Building an equity millipede

Dear Graeme,

There is definitely no need to apologise, your efforts in replying to the questions are much appreciated and it's probably a big task since you are one and we are quite many seeking your wisdom.

Have a good night,

Cam

hello everyone,

here are some charts on gbp/chf. The pair has been having good up movement in the past 2 weeks but seems to have resumed its down trend in the last few days. Any comments from Graeme or any of the other gurus would be much appreciated.

A

Good morning, all

Im just finishing off the remaining PMs this morning. I replied to the below PM but I thought it would be better to post my reply in the thread as well so it may clear any confusion for other readers as well.

Originally Posted by xxxx

Dear Graeme,

I do have one quick question, if you'd be so kind. Pasting your statement:

"6. Trading with breakouts consisting of at least 4 candles in daily or weekly; pennants, range"

Does this imply that you require 4 candles after a breakout to confirm in your mind that the BO is genuine, and not some sort of head fake? Or perhaps, do you mean 4 candles will be involved in the momentum phase prior to the BO occurring? I'm not clear on this idea.

Wishing you and yours all the best ...

Kindest regards,
xxxx

Dear xxxxx

Thank you for the message and apologies for the delayed response as I was away from forum activities for the last few weeks.

Great question and I must admit I could have phrased point 6 better.

It may be unnecessary or already known to yourself but what happens when you shake a coke bottle. A few shakes may not lead to anything exciting when the cap is opened however an extended amount of shakes almost always leads to an embarassing aftermath for the receiver of the prank.

This applies not just to coke bottle (whereas the contents of the bottle also influences the outburst from opening) but in nature, any constriction of a normal flow will consequently lead to an increasing pressure against the constriction whereas the constriction either gives way to a stronger than normal flow of outburst from its static state or the constriction must find other means to strengthen against the growing pressure. I believe this is engineering 101.

The above principal is exactly applied to the 'science' of trading as well. The longer the price is stalled with opening and closing price very close or same to the previous days (if considering analysis on daily chart) the pressure is growing around this constriction. One can say that the pressure is more or less the interest of the other traders and this is very important to understand. Personal views of traders vary vastly amongst the multitude means of personal interpretation however there is a point in time when the thoughts of the mass are focused at a similar point of context which is always at the point of constriction; stall.

The aftermath of coke bottle exploding is similar to the breakout following a prelonged stall. More shakes consequently leads to a greater implosion whereas greater the length of time the price stalls the more strength (interest) it garnishes hence a prelonged state of travel (movement) on its breakout.

This itself is a well known and much traded approach. People have coined this as breakout strategy but do they know why breakouts are so effective? Quiet simply, breakouts are effective because of the bottled pressure. Force moving out of bottled pressure is the inevitable science of trading.

Breakout is my bread and butter.

Coming back to your question, a prelonged stall followed by a breakout is almost always much longer than the stall itself. One of the phenomena of trading which has no scientific and mathematical reasoning however shows the psychological workings of the traders behind the scene. A proper volatile breakouts are easily noticed and therefore only a few correct prods or placements will inevitably capture the outburst/aftermath of the later however some breakouts may have a good short burst and then stall again or reverse. That is not a proper breakout however it is reassuring to know that this failed breakout becomes yet another notch in the increasing pressure of the same stall which will sooner or later implode far greater.

Stalls on weekly and monthly are my favourites. There are plenty of time for me to think and prod here and there and the ensuing torrent will always lead to a large range of pips and time for myself to zoom in and start picking off profits here and there whilst the torrent is still in play.

Hence, the golden trick to an effective stall/breakout is...?

The pre-longed amount of time required for a stall to build pressure (gather attention of other traders) ensuing a far greater movement at its point of breakout. Which is why I always prefer at least 4 candles to consider something a good stall but the more candles the better.

Apologies for the length of the message, but if one asks me, whats first chicken or egg? I would say it stalled first and what happened after is just evolution.

Sincerely,

Graeme

Good morning Graeme,

Thank you, I will forever remember the definition of a breakout as coined by you

Kindest Regards,

Cam

Thanks Graeme for an excellent articulation of why breakouts occur. This will stick with us for eternity

This got me thinking whether there is any difference in the strength of breakout when the constriction (S/R line) is at the 'tip of wick' price or at the open/close price.

Do you think breakouts are more powerful at candle open/close price levels and bounce-offs more powerful at the 'tip of wick' ?

Good afternoon, all

I have just finished all the PMs, thank you for your patience.

Thank you all for the kind words and also wishing everyone a successful trading career.

Adowland/alex - thank you for your kind words. Please feel to ask me any questions

Nomask - for the immense and valuable contribution to the thread

Red-dragon - I like the recent eurusd charts you have posted. How you purposefully draw trendlines to squeeze the price into a pennant. Good work.

Maaj - thank you for the warm remarks. Greatly appreciated.

Veefx - in regards to your question. Very good question and I apologize for addressing you in one post but most of us know why I do. It seems that I am also helping to answer sjb944 as well.

Veefx and sjb944, when you place your interest/positions on the battlefield as per your hindsight of the week and they survive for you. The following week they are nothing to you apart from the fact that they belong to you. Since SL is moved to BE their fate is not determined by your trading decisions however the movement of the market in store.

Having said that, this is one of the reason why I trade both directions because you will either 1. sit out for very long periods of time only choosing one direction or 2. continue to blindly trade against what is happening now because you are still being influenced from the performance week before.

Point 2 is deadly to a trader cause this proves how rigid they can be and rigidity in trading kills.

It seems like the eurusd exercise from christmas is slowly getting diluted in a sense however this is a good sign as traders are now slowly coming to understand the importance of trading both directions because....

we do not know which direction the price will goto.

In regards to your eurusd, below is what happens when you trade both directions:

http://img23.imageshack.us/img23/2183/33490286.jpg

http://img217.imageshack.us/img217/2364/79615591.jpg

http://img190.imageshack.us/img190/6560/28976853.jpg

http://img832.imageshack.us/img832/6522/75929354.jpg

http://img406.imageshack.us/img406/1093/44661589.jpg

Veefx, sjb944 the above charts will answer your thoughts and more. And it is the more that I am aiming to get across to you and everyone. I dont aim for profit daily basis however an occasional large reward so big enough that it will be more than enough to cover the time and expense required for the next equivalent reward.

Peirce - Interesting. I understand what you are trying to say and I could trade profitably without the emas on the charts or without any charts for that matter. However, one needs a point of context for easier reference. But I understand what you are saying. Thank you

Veefx - Martingale is the process of doubling up your losses and continuing to do so, anticipating the eventual winning occurence to happen next. Martingale or any part of its working is absolutely not my trading approach nor should it be on any traders agenda.

It is true that I extend my profit taking opportuntiy by adding more positions whilst the opportunity is favouring myself which is different to adding more positions cause Im at a loss. Some people might refer my method to be anti-martingale however I consider it as just taking advantage of a given good opportunity. Why take 1 when I could take 5. Why give 10 when I can get away by giving only 2. Hope this helps.

Cameron and all others - Thank you for your undying support.

Thank you all for your patience.

Kindest Regards,

Graeme

Thanks Graeme, this does provide clarity. I am reminded of your intra day exercise -- where you used the 5/10ema on the 4hr TF to buy and sell, only here the scale is larger.

That said, lets take your buy position in your above example. I can understand the sell position based on the weekly TF, however the buy position is taken before the weekly up bold candle signalling a reversal. So what TF are we looking at here for our hindsight -- still the weekly, say more than a 50% retrace of the down candle, thus anticipating at a reversal? (or am I trying to get more out of this example than you were trying to reveal?)

I'm trying to simplify, because otherwise it is easy to get paralysed by the numerous time frames, which are often conflicting.

Arguably, you could wait until the weekly bold up candle closes to buy, and thus still be trading both directions? (also possible diversifying a few of the sell positions).

Cheers
SJB

PS My apologies for hitting you with a follow up question, when you've already put in so much effort.

Good question.

It doesnt necessarily have to be that particular week.

It could have been the week after the price closed above the open price of previous down candle.

However, what happens first?

Monthly/weekly hindsight happens first followed by a ripple into the lower timeframe or the opposite? I would say both happens.

It is perfectly safe to wait for a confirmation on the higher timeframe first however you could use a very small prod on the lower timeframe meanwhile the confirmation is forming.

If there is a good setup on the lower timeframe that you know very well that has great potential vs risk which you happen to notice during that week, ofcourse a trader would take it as a 2000 pip trend can begin on a 1min tf or a 1 month tf.

Nothing wrong to set yourself to adhere to buy only when price closes above previous open price of down candle as a good movement ensuing will still have plenty more opportunity in store.

The main aim of my detailed explanation before is to show how traders can place their interest on both side of the direction capturing the eventual bigger movement of the future. And not to hold any biased sentiments on one side of the direction because they have interest in play.

Sincerely,

Graeme

"And not to hold any biased sentiments on one side of the direction because they have interest in play." ... I am certain this is going to be a challenge for me. Perhaps I am wired to think only in one direction

Good evening everyone,

Please refer to the attached .pdf ... it shows net commercial positions from the COT report (reported as of 2/15/11). The blue line is the running 52 week mean, and the red lines are +/- 1 and 2 stdev. Here is a summary:

EUR net positions at 1.5 stdev
AUD net positions at 1 stdev
GBP net positions at 2 stdev
CAD net positions at 2 stdev
CHF net positions at 0.5 stdev
JPY net positions at -1 stdev
NZD net positions at 0 stdev

So we can see EUR, AUD, GBP, CAD are historically very one sided long vs. the USD. When this happens, everyone is long ... so the market usually goes the other way in a big way. From the above, I think any of the following are good swing trades in the next few weeks .... we just need to look for appropriate technical levels to enter:

EURUSD short
GBPUSD short
USDCAD long
AUDUSD short
EURJPY short
GBPJPY short
AUDJPY short
CADJPY short

Fundamentally, I think the USD may rally because of much turmoil in the middle east.

I already have several short positions in EURUSD and EURJPY, with a few Sl at b/e.

For EURUSD technical analysis:

weekly: near TL resis
daily: near 61.8% retrace at 1.37; 1.3792 weekly R1
hourly: 1.3753 daily R1, and 1.375 previous stiff resistance

I think EURUSD may POSSIBLY rally to 1.375 , which should cap it IMO. A break below 1.365 (daily pivot) would be a good place to add to shorts, as well as a break below 1.3612 (weekly pivot).

A weekly close > 1.375 would negate short bias and favor longs.

EZCurrency

Your hindsight should be saying short with the nice BEEB on the weekly chart.
Although this pair to me has been up more than down in the last 6-7 weeks.

Hi Guys,

My search is finally over!!! Just want to share this awesome indicator that plots realized and unrealized profit/loss in real time. Google "Account Equity Analyzer"
A good tool to have for this trading approach.

Hi, I might share additional info. Every now and them, COT data shows some rare opportunities that may only occur once every few years. There is a lot to explain if you have not studied COT data, but multi-year extremes are one such an occurrence and we have this now. This may be an opportunity for the followers of this method (and amazing thread) to get some legs growing.

For example, when the commercials (the BIG SMART money) are 'heavily' short, and large traders (mainly funds – they get extremely long at market tops and extremely short as market bottoms as they are trend followers and typically ride the trend to the end, adding more as she goes) and the public are 'heavily' long it says something.

However, the raw numbers must be taken "in context" to the current market phase and everything is relative. Some examples:

1. Being heavily short may not be determined by an 'absolute' number, but by comparing current data relative to prior data. For example, a slightly short stance in the market could be considered heavily bearish IF relative to the past 6 months, it was the shortest position held.

2. Positions (COT data) is contextual to the trend. Let me try explaining by example. Commercials have very deep pockets. They can ride out the market swings, buying into dips (or down trends) and selling into rallies (or up trends). They are not planning business activities days ahead, but weeks and months ahead. Think of a commercial using currency as a "tool" (they are not “speculators” in the same way we are). They use a currency like I use petrol. If I need petrol, I have to buy it regardless of the price. If I was a commercial entity, I may have 50,000 litres ready to use, so if prices are high, just wait til petrol gets cheaper and then "top up" or do most of your buying at a more favourable price. Also, if prices are low, just keep accumulating petrol at a good price. If it drops some more, that’s fine, buy some more. If petrol was a dollar a litre and it went to 95c, that’s great, buy up! Goes to 90c, still great, 80 cents, fantastic! Buy more (my pockets are deep). I am just using petrol as a “tool” and the fact that it is now 80c does not mean buying it was 90c was “bad”. 90c was great, 80c even better! However, for a speculator (public) it’s a disaster! I am not using petrol as tool. I am buying at 90c hoping it will to up to 1.10c and then I will sell it back into the market. Why is this important? You need to think like a commercial when looking at COT data before it makes sense. NOW FOR THE IMPORTANT PART. Why would a commercial entity with massive pockets buy petrol when prices are relatively high (even then, this would in a pullback on a weekly up-trending petrol price)? For ONE reason. Because they believe it is going higher! Therefore, by FAR the BEST and MOST RELIABLE way to look at COT data is when a currency is being accumulated by commercials at high prices (typically still in a pullback) and when a currency is being distributed by commercial traders at low prices (typically in a rally). This matters a LOT. I ONLY take note of heavily commercial buying (in a pullback) in a longer term up trend or at major (weekly/monthly support/resistance levels, trend lines, etc.). Vice versa for heavily commercial selling.

3. Commercials spend a few weeks heavily accumulating (at least month - as Graeme says - 4 or more [weekly] bars) and price is consolidating/stalling. Which way do you think the breakout will be? Long maybe? Where was the BIG SMART money expecting prices to go?

There are more things to consider, but that is the basics.

So, what about "multi-year" extremes? Holding the most short or most long positions say in the last three or four years? Wow, that does not happen every day! Even better, when some long term element on trend is your favour or price is against a major support or resistance level?

Take a look at the following charts. It may serve you well to take a good look at them, but remember to place the COT data into "context".

Sorry for the long post. I really hope someone finds this useful

Dazz, Over and Out.

Note:

A. Yen, look at that agressive buying (invert for spot - so selling) into HIGH PRICES (low for spot) prices. Rare.
B. Look at the pound. Massive short positions -most short since 2007.
C. Similar for euro.
D. With dollar index, just pointing out that the usd should strengthen against yen, pound, euro (adding fuel to the fire).

Dazz,

Nice post and explanations. It does look like the USD may rally quite a bit according to other pairs (according to COT data).

I had quite the short position in EU which I established yesterday on 2/21 (about 20% of my margin used to short EU at 100:1 leverage) ... at 1.355 I covered half for nice profits (it looked like a possible short term support area), and put the rest of the stops at b/e (which were hit today).

I am looking to re-establish more shorts in EU at appropriate levels, and hold a decent short for weeks.

You correctly mentioned that the commercials can keep buying as positions go against them. This is quite true ... if you refer to the .pdf in my previous post, looking at EUR from weeks 100 to 125 ... it was oversold, but continued to fall for many many weeks. When it did reverse up the rally lasted for many many weeks from 1.26 to 1.42!

For EU ... the next significant technical level to the upside is 1.375. If it reaches that area it is a good place to short ... otherwise best to look for technical weakness to probe short, then stack when it starts to fall.

EZ

For

Graeme:

With all due respect your comment, " That is not a proper breakout however it is reassuring to know that this failed breakout becomes yet another notch in the increasing pressure of the same stall which will sooner or later implode far greater." is perpetuating a fallacy, IMHO.

Price either breaks out or it doesn't. How much price breaks out doesn't matter in determining whether or not a breakout occurred. If it breaks out by 1 pip, that is still a breakout.

Now, in trading, if we enter on a break out, and price reverses after a 1 pip move, that's just the breaks. PUN INTENDED.

Keep up the good work.

Guys, the COT aggregates order information referring to futures.

Commerical traders in this sense, would be entities which use futures as a means to fulfill their objectives of hedging themselves against foreign exchange risk; fluctuating exchange rates eating at their bottom lines.

It is not necessarily that the commercials have deep pockets, but that they are hedging their exposure. If I am an importer, I want to hedge against rising prices. Thus I will be long a futures contract, so that any price increases in the imports I am interested in, would be harnessed in the increase in value of the futures contract.

If the currency pair is falling, then the importer can be long, not because he has deep pockets, but because he has essentially hedged his exposure, making the effect of currency fluctuations on his profit potential zero. If you want to follow anyone, follow the Large Speculators (I think they are called Non-Commercial) because they have objectives which are aligned with yours; ie. they are using the futures market to speculate, not hedge and thus will align themselves with movements in the currency exchange rate.

Take a look at the Euro Chart B, to see how the Large Non-Commercials positions (green) emulate that of a speculator...

But this is only my humble interpretation, take it with a grain of salt.

Regards,
xXTrizzleXx

Right ... you need to follow non-commercials, and do the opposite of them when net position size is at an extreme (I use 1 to 2 stdev of the rolling mean).

Sure, COT is based off of futures ... but the futures track the spot closely, hence you can use the info provided by COT to trade spot.

EZ

short 1.3695 ... time to stack after SL at b/e.

EZ

Hello Peirce,

I think that the followers of the thread know exactly what Graeme means by a failed breakout (because he wrote at least one article with images in the past showing what he means).

If you agree, semantics don't matter much in trading, so let's not get stuck on them ?

Kindest Regards,

Cam

i agree with cameron, a breakout is a definition derived from our individual perception and is nothing but semantics.

a trader can define a break out as closing price, current price, high or low of the wick etc etc. and that is just defining a break out, to come to a consensus of a proper breakout is even more complex: momentum, found s/r at the previous s/r, wick sizes etc etc

this also goes back to what a chart really is, any TF is a mere addition/subtraction/compression of ticks, so a 1 tick breakout is a breakout on the tick tf but is it worth mentioning or useful for any significant profit is whole other ball park. although i must admit there is a slight statistical edge when enter break out of the extremes of the previous candle in the direction of previous candle.

Graeme's statement is a fallacy in your perspective, could you offer us some guidance/reason or statistical usefulness of a 1 tick break out/fail from your perspective as Graeme did with his perspective of a proper/failed breakout.

thanks